Dimitar Chobanov, Professor at the University for National and World Economy: The Government must focus on closing the budget gap instead of increasing spending

Mr. Chobanov, the IMF recommended to Bulgaria to start restoring the funds which were withdrawn from the fiscal reserve via privatisation proceeds and debt issuance. Do you think that, the current situation is favourable for such moves? Which would be the best option for us?
- There are more lasting expectations for a stabilisation in revenues and growth and, now, it is reasonable to consider such measures. Of course, Bulgaria can hardly be compared with countries such as Germany, but it is clear that prudence there has led to lasting and positive effects. Our country can more easily be compared to Estonia which has shown that nowadays stability is highly desirable and useful, not only for politicians but also for investors.

First, the Cabinet has to consider how to counter the rapid increase in the Government’s spending. A growth in spending is among the most common calls which has been presented as an option for stimulating the economy. In fact, the Government should benefit from rising incomes, which are mostly due to the slightly higher inflation. However, the Government should not quickly untie the purse but should primarily focus on closing the budget gap. Now, the deficit should be substantially limited, and then alone steps can be taken aimed at filling the fiscal reserve or dealing with eventual surpluses. At this stage, maintaining the budget stable remains the most important issue and the Government should pursue a zero budget balance (excluding a deficit and a surplus). IMF's proposal can be considered after that when the economy recovers from the crisis.

Regarding privatisation, this has always been a good solution for the economy, but we must be very carefully when resorting to it. Currently, asset prices are relatively undervalued, which means that it would be possible for the Government to receive lower prices than the actual ones. However, in the long run, the privatisation option has its advantages because it is possible that certain sectors will start doing better, since state intervention in these is excluded or limited. If, however, the Government launches the privatisation procedures now, there is no way for these to be completed very soon. The actual deals will be signed in about 6-12 months. Until then, we hope that the situation will be clearer and asset prices will start to increase again.

What is your opinion about the recommendation for debt issuing?
- I do not see any serious effects of such a measure. At present, the fiscal reserve is relatively sufficient in order for needs to be met. It would be better for the Government to consider how to reduce costs in order not to withdraw more funds from the reserves and maintain their current level. Debt issuance will bring about two effects. Bulgaria, so far, has refrained from very large debt emissions which means that, at this point, such a measure does not make any economic sense. On the other hand, the reserves will increase which will show the markets that there is some confidence in the country, but no one knows what will happen if the results are not good enough.

IMF experts believe that the Financial Stability Pact is a good solution but there is a need for a mechanism forecasting the economic interest to be introduced in order for the probable deviations to be calculated. What should be done in order for costs to be limited, the deficit reduced and the budget to become more balanced?
- Restoring the confidence of foreign investors is the most important issue. The data that was released in the past months showed their withdrawal from the country. This trend should be reversed in order for Bulgaria to take the steady growth path. This will be achieved with a good fiscal policy. In any case, the news that the budget is close to zero is a good signal which will increase the perception of stability abroad. Naturally, all measures which lead to a more favourable business environment should also be considered.

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